equities outlook 2012 zimbabwe

2012 Equities Outlook :

Zimbabwe

2012

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Contents

Zimbabwes Nascent Recovery ...........................................................................................4

Agriculture ...............................................................................................5

Mining.......................................................................................................6

Manufacturing...........................................................................................7

Tourism.....................................................................................................8

Financial Services .....................................................................................9

The ZSE Reviews ......................................................................................................10

Brief Reviews of Selected Companies....................................................................... 12

Econet......................................................................................................14

FBCH ......................................................................................................15

Seed Co....................................................................................................16

Delta........................................................................................................17

Zimplow...................................................................................................18

TSL Limited ............................................................................................19

OK Zimbabwe Limited.............................................................................20

Innscor.....................................................................................................21

Dairibord.................................................................................................22

Hippo................................................................................................... ...23

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Zimbabwe’s nascent recovery stifling …

Having gone 8 months into 2012, Zimbabwe’s economic prospects have remained

in delicate state inhibited by limited fiscal space amidst other contending issues

of inconsistent policy formulation , limited capital sources and huge debt overhang.

As a result, ailments taking root from the country’s precondition have been

dilapidated infrastructure; obsolete technologies and machinery; power and water

shortages, all which constitute the preface of Zimbabwe’s industrial challenges.

Deterioration of the country’s critical infrastructure has resulted in severe adverse economic and social effects that are currently stifling the country’s economic recovery prospects. The current huge infrastructure deficit is proving to be the leading binding constraint in achieving quick economic recovery and this is most apparent in the electricity sector. In the first half of 2012, overall electricity generation averaged 960MW following intermittent supplies form small power stations and a break down at Hwange Power station. Overall, the country, generates 900 MW to 1,200 MW compared with demand of 1,900 to 2,200 MW- making the country the third-largest power consumer in sub-Saharan Africa after South Africa and Nigeria, according to the World Bank. Zimbabwe imports 35% of its electricity from Mozambique and Democratic Republic of Congo, yet load shedding remains a day to day issue to contend with.

Also weighing on key macro-economic deliverables has been the contribution of public finances to the overall GDP performance which albeit improved has largely remained in deficit. In July and August, collections continued to trail the budget at US$257.4 mil and about US$269.2 mil against revised targets of US$271.2 mil and US$280.7 mil. Year to date collections are at a variance of $269.5mil at $2,120 bil. Shouldering a barrage of woes which have seen growth rates decelerating between

2010 and 2012 due to policy inconsistencies and political uncertainty, we are

brought closer to the reality that while it is relatively easy to ignite recovery,

sustaining it requires consistent policies that address the binding constraints on

growth. 2012, GDP growth rates are anticipated to decelerate by almost 4% points

from projected levels of 9.4% to 5.6% with independent evaluators indicating growth

rates lower at 4.5% for 2012.

With growth decelerating between 2010 and 2012 due to policy inconsistencies and political

uncertainty we are brought closer to the reality that while it is relatively easy to ignite recovery, sustaining it requires

consistent policies that address the binding constraints

on growth.

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Having already made headway into the second half of the year, it is imperative for

government to redirect expenditure towards key macroeconomic enablers such as

infrastructural development aimed at rising of overall productivity, reducing

financial sector vulnerabilities, increasing competitiveness, and improving the

business environment.

A review of key Macro – Economic Sectors

Agriculture

Having been drastically reviewed from growth rates of 11.6% to -5.8% in the year 2012 , agriculture sits at the core of the country’s GDP slippages. Consequently crop yields were lower on prior years with maize at 968 000 t, the estimated maize output in 2012 is about 33% below last year’s level and marks a reversal of the increasing trend since 2009. About 722 557ha of maize are estimated to have been written off as result of moisture deficits, while delayed and erratic rainfall at the start of the 2011/12 rainy season (October-March) had already resulted in the contraction of maize plantings by about 20 percent compared with the previous season’s 2.1 million ha. In similar trending, millet and sorghum production are estimated at below 2011 levels, following reduced plantings and lower yields whilst other major crops – groundnuts, soy beans, sunflower and sugar beans – also registered a decrease in production in the 2011/12 cropping season. Overall, cereal production in 2012 is put at 1.13 million tonnes, inclusive of winter wheat forecasts set for harvest in October with the national cereal production is estimated to satisfy approximately 55 percent of total domestic requirements for the current 2012/13 marketing year (April/May). Although imports of cereals are set to increase, sizeable carry-over stocks from last year’s good harvests will enable the country to partially meet the national deficit through its reserves whilst a more conducive economic environment has led to improvements in private sector operations, and commercial imports are therefore anticipated to fill a large proportion of the deficit under the current conditions. Meanwhile, Tobacco end August recorded total seasonal sales of 144mil/ kgs at an average price of $3.66/kg compared to 131.9 mil/ kgs sold at US$2.74/kg same period time last year. This realized total revenue amounting to $526.6 mil compared to $360.9 mil achieved in 2011. Despite average cotton prices having dropped by more than 50% to levels of between $0.30 -$0.40, cotton intake end August 2012 surpassed the expected total intake by 9% at deliveries of 304 112 tons. Challenges within the sector are notably erratic and insufficient power supply for irrigation, as well as constrained availability of financial credit; inadequate infrastructure; Unaffordable inputs due to high production costs eg fertilizers and Low capitalization levels.

Investment Prospects- The agricultural sector remains the mainstay of the economy and as such it is vital that a holistic approach be taken in drawing policies that can revamp this sector. Prospects for 1990 yield levels to be achieved in Zimbabwe are attainable at the right implementation levels of new capacities through investment and also through new strategic choices that lead to modernisation and commercialisation of agriculture across all sub sectors. In preparation of the coming summer season and beyond, the Farming Community, with the support of Government, the banking sector, promoters of contract farming and cooperating development partners will have to work extra hard and be more focused in mobilizing all available resources, to ensure restoration of the sector’s pivotal role.

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Mining

Contributing over 50% of total export earnings, 45 000 formal jobs, with informal small scale mining also contributing substantial numbers - mining’s contribution to Zimbabwe has almost trebled from 4% between 1999 and 2008 to current levels of close to 11% of GDP. Key minerals, which underpin the sector s growth and their respective projected outputs in 2012 are: Gold (15 tons), Platinum (12 tons), Nickel (8 800 tons), Coal (2 million tons), Chrome (750 000 tons), Palladium (9 600 tons), and Black Granite (170 800 tons). Nickel (8 800 tons), Coal (2 million tons), Chrome (750 000 tons), Palladium (9 600 tons), and Black Granite (170 800 tons). As at July 2012, cumulative gold output was recorded at 7 799.5 kgs, which is consistent with set benchmarks for attainment of f 15 000 kgs by year end. Firming international gold prices, as well as the liberalized marketing environment coupled by huge investments into the sector have commanded good growth in Gold mining. Since 2010, the country has been exceeding annual thresholds of 10 tons requisite for refinery; however, currently no refinery is being done at Fidelity Printers and Refiners due to viability problems. The company exports the bullion mainly to the Rand Refinery. The resumption of gold refining in Zimbabwe would help downstream industries such as jewelers to purchase gold locally and reduce the cost of production. Jewelers are also currently importing silver at some added costs. To kick start the refining process, an injection of about US$50 million is estimated to be required. As at June 2012, Platinum producers delivered 5,650.9 kgs against an annual projection of 12,000 kgs. At present, platinum that is produced is sent to South Africa in its raw form for processing creating macroeconomic leakages for the local economy. There is, however, need to boost electricity generation or importation if the smelting of platinum is going to be done locally as current electricity provisions fall short of requisite demand. For nickel, 4,243.06 tons were delivered by June 2012 against an annual target of 8,800 tones. Nickel production is expected to increase if the Bindura Nickel Mine reopens before the end of the year after having reached agreement with its creditors and staff that would result in the conversion of their debt into equity to enable it to raise capital and resume operations. The mine was also accorded a National Project Status by the Government, which allows it to import equipment duty free and resume mining operations – a move which we believe is encouraging for investment in the country were industry has been facing challenges in retooling, upgrading and replacing their dilapidated equipment. Gold, platinum and nickel production is expected to grow by 15.8%, 10.8% and 10.1%, correspondingly in 2012.

“The company exports the bullion mainly to the Rand Refinery.”

“At present, platinum that is produced is sent to South Africa in its raw form for processing creating

macroeconomic leakages for the local

economy.”

In as much as mineral exploration and extraction present investment opportunities in Zimababwe – Mineral Refinery is one key area lagging in investment were the country is incurring a lot of leakages.

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MANUFACTURING

Estimated to grow by 6% in 2012, manufacturing accounts for 9.2% of Zimbabwe’s exports at an estimate GDP contribution of about 10% from yester year contributions of around 18-20% achieved in the early 90’s. Decline in the sectors contribution to GDP over the years could be attributable to key main factors of de-industrialisation; Shortage of working capital and absence of lines of credit as well as immense levels of competition from imports alongside inadequate and erratic supply of key economic enablers namely electricity, fuel, coal, and water as well as poor infrastructure. Despite evident constrain to Zimbabwe’s manufacturing, industrial production has remained evident in high performing sectors, with some companies increasing their work shifts to cater for rising demand of their products. Strong growth is evident in subsectors of drinks, tobacco & beverages, food stuffs, wood & furniture, non-metallic mineral products, metal & metal products, which have inevitably offset slippages in paper & printing, clothing and foot wear, textile and ginning subsectors which have overall remained under capitalized . Finding benefit in the rebound sectors of the economy, capacity utilization levels have been upbeat at projected levels of 60% in 2012 from prior levels of below 10% in 2008 and this is illustrated in the volume of manufacturing indices growth below:

Whilst growing capacity utilization has been riding on the quantum of production factors as opposed to efficiency -hence slower growth in productivity, only about 17% of the manufacturing companies have managed to secure investments on new plant and machinery, leaving 83% with no major or new investments save for only maintenances. Weary of this point instigation is aroused that whilst capacity utilization is observed to be improving on a general scale, a percentage or so of growth could also be in retrospect to closure by unviable manufacturers. Whilst some manufactures are yet to demonstrate capacity through performance based incremental and measureable parameters, lucrative sectors for investment considering Zimbabwe’s high import levels would be retailing subsectors of food stuffs, drinks tobacco and beverages as well as wood and furniture.

“key main factors affecting the manufacturing in Zimbabwe are: of de-industrialisation; Shortage of

working capital and absence of lines of credit as well as immense levels of competition from imports alongside inadequate and erratic supply of key economic enablers namely electricity, fuel, coal, and water as well as poor

infrastructure.”

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TOURISM

Within the 6 months of 2012, tourist arrivals were estimated to have improved by 7.5% from 657 302 in 2011 to 688 288 with the majority of visitors representing 89% being from the Africa followed by the European markets. Bed occupancy rates were rather flat at 31% vs. 30% in 2011. Owing to a steady growth in arrivals, 2012 tourism receipts are anticipated to be 11.2% ahead of 2011’s $662 million speared on by the Americas and European travellers.

With Zimbabwe having attained dual chairmanship with Zambia to UNWTO, in 2012, the sector is projected to grow by 10.4% up from 4% with capacity building and infrastructural enhancement developments already underway for the 20th Session of the UNWTO in2013. Zimbabwe has over 12 000 hotel rooms available and capacity is expected to increase over the next 3-5 years. In line with the global economic recovery, we consider the outlook for the tourism sector in the long run to be positive, with expectation for improved leisure demand in tandem with improved disposable incomes. According to the WTTC, over the next 10 years, Travel and Tourism is expected to grow in importance as one of the world’s highest priority sectors and employers. The forecast for 2020 is that the direct industry’s GDP will amount to US$ 3.7bn, a 4% annualized growth rate for 2011-2020 while travel and tourism GDP is expected to grow by 4.4% to US$ 104.7bn. There is no doubt that tourism going forth will play a significant role in African countries with Zimbabwe being of no exception for as long as there is sustained investment into infrastructural development, tourism promotion and enduring political and economic stability.

The socio-political dispensation of Zimbabwe, alongside consistent

policy formulation and implementation remains critical to

Zimbabwe’s overall country perception and more imminently Tourism Industry. With the local economy exhibiting stability at present, the tourism industry has

started to coagulate.

Financial Services Sector

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Estimated to grow by 23% in 2012, the financial Services sector in Zimbabwe though resilient remains of no exception to the countries macro economic plight of capitalisation, liquidity and credit risks. Whilst two banks, Royal and Genesis have voluntarily surrendered their licenses with a further two Renaissance and Interfin under curatorship, - high exposition is made of the sectors weaknesses in regards to high credit risks, deteriorating asset quality and high non-performing loans(NPL’s). Meanwhile, nominal bank deposits continued to improve albeit at a decelerating rate of 3% at$3.64bil end July 2012 spurred on by receipts of resources from sales, proceeds from the tobacco sales and the repatriation of excess balances from Nostro Accounts as stipulated by the RBZ beginning of the year.

Deposits in the banking sector

continue to be of a short term nature,

thereby presenting worrisome

vulnerabilities in the sector. In this

regard, short term deposits, which

comprise of demand, savings and

under 30-day deposits continue to

dominate total deposits. The high

concentration of short term

transitory deposits partially reflects

that economic agents are largely

using the banking system for

facilitating salary payments rather

than deliberate and planned savings.

Meanwhile, lending growth albeit slowed down, at an LDR of 87% end August 2012 still remains relatively high weary of the illiquid macro -economic conditioning in which NPL’s have risen from levels of 7.55% in 2011 to 9.55% June 2012 against Basel II’s acceptable standard of 5%. With a mere 10.81% constituting long term deposits within the total banking

sectors deposits, financing remains a key constraint to growth in the economy

wherein 83% of the manufacturing industry still remains under capitalized. In

check with the banking sector confidence levels within then country, the term

structure and composition of total bank deposits is likely to remain unsupportive to

long term investment even in 2013 were we anticipate structural changes to take

place within the architecture of the sector. With over 60% of banked deposits

sitting within the top balance sheets of a mere 4 /25 banks we envisage possible

operational bottlenecks within the financial services sector wherein one banks

weakness can be magnified into an industry wide grid lock. Capitalization and

credit risk management remain of impetus to the deliverance of the financial

services sector to economic growth especially in the absence of the lender of last

resort function.

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Having Captured the operating environment , what has been the

Equities Market Response :

The ZSE Review

Indices – The Zimbabwean stock market maintained a bearish trend. No significant

improvements were attained in the indices in the year to August mainly due to

continued subdued market fundamentals. Having closed December 2011 at 145.86

points, the industrial index was on the free fall, slicing 9% to cap off the month of

August lower at 132.82 points chiefly attributed to persistent sell-offs in most heavily

capitalized counters, coinciding with the lack of foreign support. Foreign inflows

came off 7% to $10.7 million against $11.6 million at the close of December 2011 as

foreign portfolio outflows dropped 49% at $9.3 million. Meanwhile the resources

index lost 12% to close at 100.70 points as investors adopted a cautious trading

approach pending the indigenization law that continuously brought in uncertainty in

the mining sector. Consequently, market cap dropped 7% close at $3.4 billion.

Turnover- The June earnings period has had little impact on the local bourse with total turnover losing 49% at around $23 million against $45 million as at 31 December 2011. Negative foreign investor sentiments, blamed on policy inconsistencies and controversial empowerment laws have seen a reversal of the appetite of foreign investors on the bourse thus further worsening the total activity mainly at the close of the midyear. Market turnover opened the year at around $45m and declined to $31.8m April before slightly improving to $41.6m in May and then weakening in August at $23m. Most importantly, the continued liquidity squeeze compounded by the lack of foreign investors support left the pace on the bourse exclusively determined by high valued stocks. Resultantly, funds flow continued to be skewed towards the Top ten counters by market Cap which are illustrated alongside.

Foreign Portfolios: Foreign investors were net sellers as investors were liquidating their portfolios. Foreign participation measured in terms of total inflows accounted for 48% of total turnover over the period under review. Month on month, foreign investors were seen to be most active in the month of January representing 74% of total turnover, the month in which the stock market performance was a bit promising ahead of the reporting season. Foreign Purchases stood at $10.7 million, wherein sales recorded amounted to $9.3 million. The Top ten market cap contributed 69% ($2.2 billion) of total market cap.

ZSE Sector Performances:

Banking sector was the worst performing sector; shedding off 36% at 63.18 points on uncertainty that banking sector may fail to meet the new capital threshold with respect to the market wide liquidity squeeze. The Tourism sector followed, down 34% at 22.76 points. Meanwhile the Dual listed sector exhibited the best performance, gaining 17% to close at 134.18 points. In total, 7 sectors recorded losses against only 3 closing in the positive.

Topping the risers list was Falgold, buoyed on primarily by the firming of gold prices in the international market. Astra was positioned second putting on 160% YTD as Star Africa gained 115% YTD. Meanwhile, liquidity constrained counters in dire need of recapitalization characterized the shakers for the period led by the Pharmaceutical concern Medtech. GB lost 77% in the year to date while PG and Willdale came off an identical 75%.

Sector YTD Counter YTD

Retail -6% FALGOLD 233%

Property -20% ASTRA 160%

Tourism -33% STAR AFRICA 115%

Manufacturing 0.4% BAT 113%

Insurance -13% AFRE 100%

Agro-Ind -25% MEDTECH -80%

Conglomerates 2% GB -77%

Banking -36% PG -75%

Dual Listed 17% WILLDALE -75%

Mining -9% BINDURA -70%

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Moving into the 4Q: 2012: With a cautious trading approach by investors, we expect the local bourse to remain flat for the rest of the year. In our opinion, we anticipate the currently obtaining market down turn to persist largely on the lack of foreign support. With the onset of the festive season we are in anticipation of increased volume trading within the first two months of the 4th quarter as some portfolios will be trimmed down in order to absorb anticipated expenditure. Though playing it safe seems noble at this point in time, we challenge investors alike to be a little daring and outstretching and take advantage of the “buyers market” conditions in which most company assets are heavily discounted. With the coming in of the festive season, which is usually a time of high expenditure for both individuals and corporate alike, prices are likely to be more depressed and ripe for picking as everyone scrambles for the little liquidity in circulation.

Which Sectors do we envisage value?

Agro- Industrial: Despite the growth being revised to the negative, the sector remains one of the major variables in estimating economic growth. Being the backbone for the economy, the mandate by the government to compliment its thrust on the land issue we expect the sector to continue being supported by market friendly policies targeted at providing sustenance and growth in the sector in the form of cheaper funding and input schemes. We envisage some listed counters being major drivers and beneficiaries to the industry’s growth, translating into an overall improvement in the sectors earnings.

Our Picks: - Seed Co ; TSL; Hippo; Zimplow; Dairiboard

Retail/ Consumer orientated: Emerging on the key list of sectors the retail sector is considered as one of the most liquid sectors in the economy. With margins still trailing many of the sectors of the economy, we expect improved earnings encouraged by increased expenditure over the festive season and thus anticipated to support prices of stocks in the sector. The existence of humankind is inevitably translated in the potential growth impetus of revenue incomes of the sector in consonant with the growth of the economy despite at slow pace.

Our Picks: OK Zim ; Innscor;

Beverages : An increase in diposable incomes in the informal sector particularly small scale miners, retailers and farmers is

expected todrive growth in the sector. Consumpition multiplier to GDP per capita is estimated at around 2.2X at the close of FY

2012. GDP volumes uptake in the sector are highly correlated to the level of GDP Growth. Despite the downward review in GDP

forecasts, we antcicipate sustainale growth in this setor.

Our Pick : Delta

Telecommuncation Industry: The upsurge in mobile banking and money transfer services is expected to create positive

additional revenue flows as is growth and diversification into broadband based serives is expected to cushion declining average

per ARPU’s as penetration expands.

Our Pick : Econet

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Brief Reviews Of Selected Counters

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The telecoms industry has emerged the hot spot for most countries economic

development, not only for developed world but also in the developed world. Since

dollarization, Econet posted a significant double-digit increase in sales each year

reflecting (CAGR of revenue 2010 through 2012:+19%). In our view we expect (CAGR of

revenue 2012 through 2017:+24.2 %). The telecoms giant released a very strong set of

results for the FY12 with revenues expanding significantly 23.8% to $611.1m against

$493.5m realised in the comparable period last year, backed largely by significant

growth in the subscriber base. ARPU increased 5.6% at $10.33 as a result of higher usage

due to improved capacity and management envisaged to defend ARPU at not less than

$10. Consequently earnings have continuously improved as well (CAGR of EBITDA 2010

through 2012:+17.5%. Ultimately, EBITDA increased 20% to $291 million due to a

significant growth in operating costs and with expection for operating efficiency and cost

optimisation. EBITDA margins were maintained at a constant 47% judging from fixed

nature of the bulk of the company’s operating expenditure and partly semi variables. We

expect (EBITDA CAGR:2012 through:2017) of 24.8%. PBT increased 21.7% to $239.1m

as taxation surged 32.3% to $73.4m to leave PAT at $165.7m, an increase of 17.5% from

the prior year. Income attributable to shareholders edged up 15% to $161.3m. EPS

notched up 21% at $1 from 0.83c. Debt closed at $249mil as debt to equity ratio

improved.

The group commands the bulk of the market share of over 70%, followed by Telecel 17%

and Net-One at 13%. Since dollarisation EWZ has invested $614m in CAPEX and this

network investment has enabled the group to grow its subscriber base with a CAGR 0f

52% from 2009 through 2012.

Attractive valuations

Basing on our PE valuation, the share price is grossly undervalued. This clearly indicates

that the earning perspectives are not yet reflected in the share price. Accordingly, we

predict an increase in EPS to $1.25 for 2013 and $1.55 for 2014, largely on the

assumption that the share buyback underway, the company’s large net cash position will

be able sustain the share price’s northern journey. Based on our fair value estimate we

have determined an EV/EBITDA of 2.2, PE ratio of 4 and a forward PE ratio of 3.2.

Applying a weighted combined multiples valuation (PER and EV/EBITDA), we arrived

at a target price of $6.2, an upside potential of 35%. Projecting that the company will

grow annual cash-flows at a constant 30% in 2017 and beyond, using a 5 year growth

period, the company terminal equals $1.654 billion. This means in 5 years, Econet’s

infinite future cash-flows will be worth $1.278 billion using a suggested discounted rate

of 25%. A constant growth was suggested as we foresee no huge dynamics in the voice

space that is turning to maturity, coinciding with the imagination of the company’s

management.

Market Statistics

Sector Telecoms

Report Date 10-Sep-12

Shares in Issue 96,551,042

Market Cap $401,351583.60

Beta 0.779425

Target Price $6.2

Upside Potential 45%

YTD Average daily traded

volumes 81,017.66

YTD Peak Price $4.3

YTD low Price $3.6

Current Price $4.25

Share Price Performance

Over the last month -2.50%

3 months -0.50%

12 months -2.50%

Rating Strong Buy

Share Price vs Index returns

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Earnings maintains in upbeat tempo………..

FBC Group attained a strong set of financials in the first half (H1) of the year 2012.

Having grown total income by 39% in the H1 of 2011. FBC Holdings further grew total

incomes by 30% close the H1 of 2012 at $31.6m. Total income was largely driven by net

interest income at $18.6m having increased significantly 54% against $24.4m attained in

the prior comparable period, fees and commission to the tune of $11.3, net trading

income from the manufacturing business Turnall at approximately $0.76m, net earned

insurance premium of $2.5m and other operating income to the tune of $0.39m. The

group’s PBT went up 44% at $9.2m against $6.4m last year speared largely by the

banking operations, ushering in 44% at $3.8m wherein operating expenses were fairly

flat at $21.1m attributed to the inception of e-commerce. At the centre of the Group’s

performance was core business, the banking operations, FBC Bank, contributing 56% to

total income at $17.8m, distantly followed by FBC Building Society, ushering in 16%. The

manufacturing unit Turnall was positioned 3rd accounting for 15% contribution as FBC

Reinsurance and the insurance arm Eagle came in with 5% and 4% respectively while the

Micro Plan unit accounted for 3%. With the tight market liquidity conditions in the

equities market the Securities division was the least performer, chipping in $0.1m.

Total income tax expense was $2.2m, up 48% leaving attributable profit for the group at

$6.9m. Resultantly EPS was 61% firmer at 1.06c. Total balance sheet grew 24% at

$346.3m. Over the period total deposits went up 38% to $222.5m positioning the group

on 5th position in terms of total deposits in the market relative to peers. Total credit

closed at $39.2m and management indicated that these facilities were being honoured

when due to further open up opportunities for new lines of credit. The Loss Given

Default for the group was reckoned to be relatively very small considering that bulk of

loans and advances are concentrated in Grade A/B- good quality and ability to meet

commitments in no doubt (92%) while Grade C/D/E accounted for the remaining 8%.

FBC the customer’s bank

The balance sheet is highly liquid and the company has a very conservative loan/deposit ratio to which the management reckoned that the record speaks for itself. Management indicated that throughout the liquidity crisis that the country experienced from November last year to early this year, basically there is no one who can confirm had experienced problems to move their funds from FBC Bank to other banks. Whenever the account is funded management acknowledged that they ensure that within a half and a second a customer is able to move funds through the RTGS whenever needed. FBC Bank has a policy that whenever the loan/deposit ratio reaches 75% the company always puts in place strategic measures to ensure that the required levels of around 70% are achieved despite levels like 80% being common to the market. Loan/deposit ratio increased 9% points to 77% from 68% in the same comparable period. The reason to remain liquid and/or to maintain cash and cash equivalences is very high in order to meet the transacting requirements of the customers.

Our Recommendation

The continued disciplined structures of the balance sheet ultimately justifies a persistent

positive footing in the financials of the group. We forecast an idenetical 25% growth in

interest eraned income at approximately $33.3m and $41.6m in 2013 and 2014

respectively. PAT is anticipated grow between 15 and 20% to averages of $14.7m in 2013.

The same is maintained in 2014 that is in line with $15m expectations by the

management. FBC Holdings share price is bound to re-rate upwrads to give a true

replica of the significant financials and also the much anticipated strong performances

in the ensuing years. At 6.6c, the group is undervalued and we expect at least 10%

increase in the H2 at around 7.26c.

Market Statistics

Sector Financial



Market Cap $39062108.38

Beta 0.0936

Target Price $7.2



volumes 222,363.41

YTD Peak Price 8c

YTD low Price 5c

Current Price 6.6c


Over the last month 2.90%

3 months 11.48%

12 months 4.60%

Rating Buy

Share returns vs. Index returns

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Sales Growth Boost Revenues in FY12……..

The leading seed giant recorded a 20% increase in revenue at $117.7m relative to the

prior comparable period, having improved sales volumes by 22% at 67,240 metric

tonnes compared to last year. Group capital expenditure for the year came off a slight 3%

at $9.8m relative to $10.1m. CAPEX in FY13 is planned at $7.5m. The Group margins

came off from 51% in the previous financial year to 45% levels in FY12 largely due to

oversupply situation in the country. Resultantly, the group had to reduce prices to push

volumes, to remain competitive as well as to grow market share with respect to

oversupplies taking a cue from good seasons in the prior years. Finance charges

increased 48% to $4.3m against $2.9m last year due to carryover borrowings used to

fund increased production. To the group, CAPEX has remained a major thrust as this

warrants a competitive edge in identifying and developing new varieties.

Zimbabwe production accounted for 38% in total revenue for the group as the group

managed to retain its lost market share during the time of economic hardships. Zambia

was positioned second contributing 23%. Quton ushered in 13% to group’s total revenue

while Malawi followed closely at 10%. Malawi and Kenya accounted for 5 and 4%

contributions respectively.

The group`s profit before tax for the period was relatively flat at $23.5m. Total income

tax expense came off 27% at $4.4 from $6 leaving the attributable income higher 10% at

$19.1m. Earnings per share were 9.4% higher at 9.9c against 9.05c. Seed Co declared a

dividend of 1.64c per share, which was 30% lower the previous financial year.

Investments in research activities edged up 28% from the prior period for the group to

adopt new breeding technologies and also to penetrate new markets, such as West

Africa. Sales and marketing expenditure went up 34% as the group embarked on

increasing investment in promotional campaigns in all major markets in a bid to

stimulate increased demand. Total assets increase 28% to 157m against $123m in the

prior comparable period.

Our Recommendations

There is a close correlation to growth in agriculture and the use of seed products; hence

we expect firm demand for agriculture development likely to stimulate the demand for

Seed Co’s product range. The existence of human kind entails that the market for food is

inevitable. Point in case being that, demand for Seed Co’s product range is inelastic,

confirming perpetual future incomes. The ability for the company to sustain dividend

payment since the inception of multicurrency can be used as proxy to acknowledge good

performance of stock. Using the P/E ratio Seed-Co at $0.85 is undervalued. We project

margins to be maintained flat in the domain of 39 and 42% considering the excess

supplies of seed by seed producers against the expected dry spell periods in the region.

However, with the retained market share, any significant demand for seeds will to a

greater extend benefit Seed-Co with respect to a large clientele base. With the selling

season turning the corner, we expect an upside potential of 12.5% implying a price of

96c.

Market Statistics

Sector Agriculture



Market Cap $163902257.25

Beta 1.34

Target Price $0.96

Upside Potential 12.5%


volumes 73,565.03

YTD Peal Price $1.25

YTD low Price $0.8

Current Price $0.85



3 months 0.00%

12 months -33.6%

Rating Buy

Seed-co returns vs. Index returns

16 | P a g e

Posted strong FY results………

The Beverages giant posted strong results for the year FY12 with overall beverages sales

volume growth improving 19% at 6.908 mil hectolitres against 15% in FY11, driven by

growth across all the beverages, backed by strong market share positions across all

beverages. The strong growth was championed by investments in machinery, brands and

capacity. The premiumisation of lagers which the group reckoned was largely successful

saw volumes increasing by 15.6% in F12 compared with 11.3% in F11. The group's lager

volumes at 1 981mln hls were 22% ahead of the record volumes of March 1998 when

volumes reached 1 629 mln hls. The change in mix for sparkling beverages with the

convenience pack growing by 28.6% in F12 from 20.9% in F11 while the RGB declined to

71.4% in F12 from 79.1% in F11 showed that the premium category was becoming a

bigger part of the portfolio. In 2011 Delta had achieved 1 608 mln hls.

On the sorghum beer the Scud increased by 93.1% from 89.5% while the shake-shake

came in at just under4% mainly because of pricing mechanisms. Draught dropped

significantly to 3% from 6.1% last year. Maheu brand grew by 4% to 0.93 mln hls whilst the volumes in the plastic business grew by 29% sustained by improved uptake from

local producers. The sparkling beverage rose by 29% to 1.5 mln hl. On sparkling

beverages the group indicated that they will introduce more PET packs, 300ml and 1litre

and more products are planned for in F13. Capex to EBITDA ratio is targeted to range

between 30-50% in the medium to long term. A new 600khl packaging line was installed

and commissioned at Graniteside Soft Drinks Plant in November last year and this is

expected to give leeway for the group to surpass targets. Management indicated that the

beer line was operating at full capacity whilst Sparkling beverages and Sorghum were

operating at 75% and 66% respectively. Overall, Delta was operating at 77% on average

of its 9mln hectoliters installed capacity.

The group`s profit before tax for the period was up 41.7 % to $99.3 m. Total income tax

expense was $24.1 m to leave the attributable profit to the group at $75.2. The EPS was

up 38.2% to 6.22cents. Aggregate assets grew by 35% due to capital expenditure of $74.

The trade and other receivables figure went up 42% at $37.3 m due to prepayments

made to barley farmers. Borrowings increased to $60. Having satisfied with the

financials, the group declared a dividend of 2.08 cents, an increase of 38.7% against 1.5

cents last year.

Our Recommendation

The monopoly status of the group gives a leeway to continued improved margins in the

ensuing years. With continued investments in plant and machinery, there is large scope

for Delta to exploit the profits that came with the stable SU$ salaries. In our opinion we

expect a 25% increase in total revenue to around $693.5m. EBITDA margins are

expected at 22% translating to 21% increase in total income at $90.8m. Against the

strong financials and the monopolistic nature of the beverages industry, Delta is bound

to re-rate upwards to $0.90, representing an upside potential of 27% having realized

that using our PE valuation the stock is undervalued.

Market Statistics

Sector Beverages


Shares in Issue 1,184,908,715

Market Cap $888,681,536.25

Beta 0.99975

Target Price $0.9

Upside Potential 27.0%


volumes 821,195.71

YTD Peal Price $0.82

YTD low Price $0.65

Current Price $0.71



3 months 2.90%

12 months -11.3%

Rating Buy

Delta returns vs. Index returns

17 | P a g e

Zimplow – Vying for expansive growth and dominance

With a 57,2% acquisition on Tractive Power in H1- 2012 following a 49% acquisition in

Afritec , Zimplow has been unwavering on its growth strategy through continued

investment into both backward and feed forward synergies into the Group. At 2012

interims Revenue for the Group was 12% points lower at $4.3mil on depressed

performance from the local market which weighed heavily on local margins achieved

as most sales units were sold on the export market. Consequently Group profitability

slumped in to the negative terrain by -$214 000 aback reduced capacity utilisation

coupled with financing costs arising out of the Tractive Power’s acquisition which

required bridging financing before the conclusion of the rights issue in the market. EPS

was 126% consequently at -0.05c from 1c prior year.

Operationally - A poor agricultural season, liquidity shortages and droughts in most

markets affected the group performance adversely seeing. Mealie Brand the flagship

brand for Zimplow register a 49% decline in local implement sales unit to 9 359 units

despite a 16% growth in implement volumes. Cotton wars offered no reprieve to the local

market as the improved harvest failed to incite anticipated demand. Exports however

grew by 87% to 10 730 units driven by strong product demand in which the group

leveraged off timeous product delivery – displacing cheaper Chinese products. Spares

sales were also down by 29% to 70 825 units overall translating into a 7% production

decline at mealie brand at just about 1 411 072kg. CT Bolts- Despite a drop in overall

sales units, the unit recorded a 6% increase in $ Revenue as a result of the change in

sales mix. The recovery of the mining sector saw CT Bolts selling a higher number of HT

Bolts than prior year by 0.3% whose dollar contribution was significant to offset against

a 7% drop in sales volumes. Overall production at CT bolts was up 27% at 65 785 kgs.

Low capacity utilisation levels continued to put pressure on margins at the unit. Sales

volumes in kgs overall dropped by 15% at Tassburg. Consequently, revenue declined by

13% from prior year. There was a significant decline in popular lines namely veranda

bolts and HT bolts. Veranda bolts are facing competition from cheap imports whilst

factory under-recoveries continue to put pressure on profit. Afritac’s implements and

spares volumes rose by 15% and 38% respectively buoyed by the Lesotho market which

has 2 seasons aback good enquiries from the Western Cape. Were it not for erratic rains,

sales growth would have been higher for the unit. With Afritac exhibiting head on

growth, Zimplow wishes to up its stake to levels of 100% as the unit remains

synergistic to the Groups structuring.

Our Recommendation

Despite a poor performance at Interims by Zimplow we remain bullish on the Group as we envisage long term growth in the company’s strategic acquisitions. Zimplow’s major attraction lies in its focused business model mainly focused on implements for small scale farmers, growing revenue and earnings, cash generation and attractive dividend . Key risk factors meanwhile are mainly unreliable weather conditions since most of the subsistence farmers depend on rains. Through the acquisition of Tractive Power , Zimplow is positioning well for a rebound in the mining sector which though gradual remains imminent to overall economic growth. With the Group currently in its consolidation phases wherein Tractive power’s performance is still to be weighted into Zimplow – imminent forecasts for 2012 FY remain farfetched. However we hold that with current operations having returned to profitability in the month of July at a PBT of $65 417 and driving towards clearing out the year to date loss of $56 230 in the second half, a flat performance would be a fair show by the Group. Margins are going to continue coming under pressure from competition as well as rising production costs – especially utility, labor and steel prices. Our view is that EBITDA margins will come off to 20% in FY2012 from prior levels of 24% whist net profit will come off to around 12% of sales from 17,6%. Valuing on a blend of relative P/E and EV/EBITDA model, a fair price of 8c is achieved, implying 25% upside potential.

Market Statistics

Sector Manufacturing


Shares in Issue 336 277 628

Market Cap $19,840,380

Beta 1.585

Target Price $0.08



volumes 318 962

YTD Peak Price $0.09

YTD low Price $0.06

Current Price $0.06



3 months -11.00%

12 months -37.00%

Rating Buy

Share returns

Mealie brand Supplier of animal

drawn implements and

hoes

CT Bolts distributor of mild steel

bolts and nuts, nails and

a wide range of other

fasteners.

Tassburg supplier of Wood

screws, Veranda Bolts

and High tensile bolts.

Afritec import and sale of

animal drawn

implements and tools

Tractive Power retailer of

internationally

recognised brands

Northmec, Farmec,

Barzem and Puzey and

Payne

18 | P a g e

Having taken a strategic decision to streamline into 5 of its key operations namely Logistics operations; Paper and packaging ; Tobacco operations; Agro-inputs and Properties and administration, - TSL achieved a modest increase in turnover of 9% at $24.4mil which in turn translated into an attributable earnings increase of 52% at $2.3 mil aback improved efficiency and effectiveness. However, excluding, Hunyani - the paper packing unit, from the Groups performance, turnover growth is recorded at 19%.Operating profit grew by 57% to $3.2 mln whilst EBITDA came in 28% stronger at $4.1 mln. The 57% increase in PBT could be attributable to a 20% capacity expansion at Bak Logistics, a 27% reduction in Chemco’s H1 loss, a fourfold increase in the group’s share of Hunyani profits at $241,000 and the benefits of the cost containment initiative. This all culminated in the 75% increase in the EPS to 0.7 cents after the effective tax rate declined by 4 percentage points to 32% from 36%. Gearing was contained at below 1% cognizant of the group’s healthy cash position. Ranking revenue contributions by subsidiary Hunyani led after having achieved a 6 % growth in revenue as Bak Logistics, Propack, Chemco, TSL and Avis trailed in the given order. However Looking at PBT contributions , Bak logistics having achieved a 57% growth in sales on the back of a more active distribution market and a 20% increase in storage capacity – contributed the lions share followed by Propack, TSL, Cutrag, Hunyani and Avis. Despite improved sales at Hunyani margins remained thin culminating in Hunyani’s lower contribution to PBT whilst Avis - which is a car rental unit , remains a misfit into TSL limited overall structure. Looking at operations: In a bid to limit the effects of increased competition in the auctioning business Tobacco Sales Floor has engaged in a grower’s scheme in a move meant to strengthen TSF’s position and enable it to capture value along the whole value chain. The business will establish its position in the tobacco business by integrating backwards and forwards as well whenever necessary. TSF’s revenues have been heavily impacted by the increased competition and this coupled with the small crop output in the 2011/12 season have led to a decreased market share, at 34% in H1:12 vs. 56% in H1:11, though revenues have been maintained ahead of budget. TSF is also actively pursuing opportunities to make better use of surplus floor space in its 50 000 m2 auction floor which is idle due to lower crop output over the years. The Hessian packaging business, Propack, exhibited strong performance in H1:12 and the business have continued to focus on cost containment. Meanwhile, there has been a strong initiative by the group to invest more resources into Propak in order to diversify its seasonal revenue streams and rebuild on market share. Meanwhile restructuring at Chemco has been progressing well with the unit on track to profitability whilst the voluntary de-listing of Chemco is also on track and is targeted to be completed in the current financial year. Efforts to dispose of loss making TS Timber are also progressing well with the transactions earmarked for completion before end of the year. Agro input unit, Agricura’s, restructuring is on track with orders under the new merchandising model having been scheduled to be delivered early August. On the logistics unit, BAK, there are plans to make better use of the 170 000 m2 warehousing space and the group

has already started using some of the space for distribution purposes. Printing and packaging unit, Hunyani had a lackluster H1:2012 performance attaining a PBT margin of 3% and the group is engaged in on-going discussions with its partners, Nampak on the future strategy for the unit whose fortunes has been greatly affected by foreign product competition.

Our Recommendation

With the Group having extensively focused on streamlining operations and leveraging off its critical mass the business is more focused and well-positioned for sustainable growth in the medium to long term, For quite some time quality assets has been the attraction for investment in TSL and now under new management were these assets are starting to sweat , we are optimistic of the Groups prospective outlook . Based on our multiples valuation of P/E, EV/EBITDA -TSL yields a targeted price of 13.2c implying 20% upside potential from the current levels and hence we pass a buy recommendation on the counter.

TSF Tobacco Auctioning

Bak Logistics Transportation Distribution, storage and port handling

Cut Rag – 30% Cigarette manufacturer

Hunyani Printing and Packaging

Propack Tobacco wrapping Hardware implements

Classic Leaf Contract farming tobacco

Avis Car rental , tours

Agricura Agro chemicals

TSL Property Property

Market Statistics


Shares in Issue 344 888 516

Market Cap $37,454,893

Beta 0.706

Target Price $0.15



volumes 537,198.00


YTD low Price $0.06

Current Price $0.11



3 months 88.00%

12 months 36.00%

Rating Strong Buy

Share returns

19 | P a g e

OK Zimbabwe achieved a 60% revenue growth at $412.56 mln and$10.31 mln profitability at FY2012 anchored in two years of solid investment into the retail Group which ushered in the new OK Mart brand. With a retail span of 53 outlets sitting on 78 500m2 of retail space the retail giant employs 3 458 staff. During the year OK Zimbabwe added 2 OK Mart stores and this had a meaningful impact on the group’s market coverage as Q1:2013 they accounted for 15% of the Groups revenue. EBITDA rose from $8.1 mln to $19.2 mln driven by an improvement in gross margins and costs optimization. Gross margins improved marginally from 16.8% to 16.9% due to high consumption of low margin basic items, economies of scale and new plant and equipment which reduced maintenance costs. Overheads at a growth of 43.5% remained below revenue growth seeing the overhead to revenue ratio improve from 14.8% to 13.3%. Major costs drivers to the Group being marketing costs, high utilities costs, cost of security and increased usage of generators. Stock turnover at 9.6 times remained within the Groups target of 10 whilst ROCE improved from 15.5% to 24%. Shrinkage was improved from F10 level of 2.5% to the current levels 0.7% whilst the monetary value has been trimmed from $3.8 mln to $2.08 mln. With Profits for the year up 140% to $10.3 mln, net cash generated from operations stood at $11.17 mln. On the balance sheet OK Zimbabwe accessed $5 mln convertible debenture at 12% according to the agreement sealed in 2010 targeted for further refurbishment. Turning to the operations: OK Zimbabwe imports 60-65% of its grocery items mainly from South Africa whilst general merchandise and house wares come from as far as Asia in China. As a result the group has continued to source directly products whilst also leveraging on agencies the foreign supply base mix all targeted at reducing the middlemen and overall costs of production. However, the Group had been affected by quota restrictions specifically on chickens but however highlighted that the group continued to apply for licenses. Credit terms averaged 30 days with constraints emanating in sugar purchases which remain prepaid. Circumstantial to the Groups reliance on imports, logistics and distribution have become key areas of investiture as it is key to the supply chain. Cognizant of still high shrinkage levels at 0.7% the group has adopted Enterprise Risk Management Systems in addition to its CCTV’s, tighter controls and monthly stock take exercises. With the group achieving better sourcing and a change in the merchandise mix to higher margin products as well as continued maintenance of low shrinkage levels OK Zimbabwe’s revenues for the quarter ended June 30 were $117mln, up 31.5% on previous corresponding period of $89 mln. The group has seen a growth in operating income of 49% whilst store redevelopments are on track.

Our Recommendation

Mass grocery retail industry remains competitive by regional standards with per capita food consumption remaining very low creating opportunities for further growth on disposable income shifts as independent retailers continue to dominate heavily among low-income consumers in particular. The adoption of the US dollar and the relative political stability considerably strengthened the mass grocery retail industry in 2009, a trend expected to continue over the coming years. Zimbabwe’s mass grocery retail industry remains an investment target for leading South African retailers in particular. Once political and economic recovery begins, with store infrastructure already in place, foreign investors could purchase stores at bargain prices. The would be threat lies in business planning which remains highly challenging given the improving but still delicate political climate. With F13 revenue forecast to grow by 15% to levels of $490mil, gross profit and operating margins are anticipated to be maintained flat at levels of 18% and 2.8% respectively implying a bottom line of around $12.5mil. Cognizant of this our valuations place OK’s EV/EBITDA of 3.2 x to 2013E, placing the stock at a discount when compared to peer retailers. We calculate OK’s target price at 15c implying an upside of 18% from current levels. At a historic PE of 10.7x and a dividend cover of two times, makes OK an attractive investment to value investors.

Market Statistics

Sector Retail


Shares in Issue 1,034,201,640

Market Cap $124,104,196

Beta 0.4632

Target Price $13.20



volumes 577,965.00


YTD low Price $0.10

Current Price $0.12



3 months 17.00%

12 months 23.00%

Rating Strong Buy

Share returns

20 | P a g e

Having spent $110 mln in Capex over the years of which $80 mln was spent on expansion; Innscor Africa Limited is targeting to continue with its expansion drive for the coming year with an additional $50mil in bakeries fast foods, household goods and Colcom. Ttargeting a 15% revenue growth for the year ending June 2013 as well as improving efficiency through leveraging on synergies within the group, liquidity remains an issue of contention on that diminishing disposable incomes coupled by an increasing debt-trap in individuals for credit.Meanwhile, FY2012 Revenue grew by 21%, against a forecast 25%, at $627 mln whilst group EBITDA was 33% stronger at $68.53 mln. EBITDA margins were up 100basis points at 10.1% driven mainly by improved efficiencies across the group. Equity accounted earnings were 23% better at $7.56 mln despite the disposal of a stake in National Foods. PBT was 36% stronger at $61.3mln seeing the Group record a 46% growth in EPS to 7.15c. Discounted for National Foods disposal the growth in Headline EPS is recorded at 40%. Innscor declared a final dividend of 1c which took its total dividend to 1.75c for the year, which is a 46% increase compared to 2011. From 2009, the group has paid close to $50 mln to shareholders as dividends comprising $20.3 mln in cash and $28.5 mln as dividend in-specie on the Padenga. On the Balance Sheet, gearing was improved at 10% from 18% whilst net current assets almost doubled to $33.11 mln – growth which is anticipated to support working capital with the debtors’ books at household goods which increased by $4.6 mln. Operationally: The continuous improvement in efficiencies since dollarization has seen a gradual uptrend growth in Innscor’s operating profits since dollarization, a position which is anticipated to continue. FY2012 Revenue performance was driven by bakeries and fast foods weighing in $246.3 mln to total revenue which was a 32% growth from prior year. At PBT level, Spar despite narrowing down its losses by 30% to $1.70 mln, was the only one in the red, whilst Bakeries and Fast Foods were maintained dominance. Bakeries volumes increased by 52% to 114.6 mln loaves with production having increased from 200 000 loaves a day to 350 000 loaves a day. An additional plant with a capacity of 100 000 loaves a day which will take capacity to 400 000 loaves per day is anticipated to be installed within Q1. Fast Foods business, customer counts increased by 11% to32.1 mln. Whilst the average customer-spend in Zimbabwe was 3% stronger at $2.85. Thirteen, new counters were added to the network taking Innscor branded outlets to 131.Customer counts for regional operations rose by 3% to 11.3 mln . Regional average customer-spend was pegged at $4. Distribution Group Africa (DGA) registered a 20% growth in volumes with market competition at stiff levels. Meanwhile, the Spar retail average spend, both local and regional, had increased whilst volumes processed increased by 16% in the SPAR Distribution Centre and Freshpro. On to the households, volumes were up 30% with marked improvement on the quality of the debtors’ book. Associates, National Foods recorded a 15% growth in volumes to 404 000 metric tonnes and the Group would continue to dispose of non-core assets in the unit to make the balance sheet more efficient. At Irvine’s, Chickens sold rose by 14% whilst table eggs rose by 7% to 15.725 mln and day old chick by 19% to 26.964 ml. Additional hatching capacity is anticipated to be installed .

Our Recommendation

In almost every operation, Innscor is showing strong growth whilst loss making entities

are being brought to consolidation. With management keen to further expand the

Group, Innscors strength and investments case is further enhanced. With the headline

EPS set at 7c levels for 2013, Innscor’s worth is far discounted at current levels. This is

further ascertained by our combined weighted valuation model which yields an 85c on

Innscor propelling us to advocate it as a buy with upside potential of 31% on pricing.

Market Statistics

Sector Conglomerate



Market Cap $328,071,064

Beta 0.8427

Target Price $0.85



volumes 134,550.00


YTD low Price $0.53

Current Price $0.60



3 months -4.00%

12 months -14.00%

Rating Strong Buy

Share returns

21 | P a g e

H1 June 2011 results inspirational

Riding on improved volumes, turnover went up 14.47% to US$48.643 million from the

US$42.5 million recorded in the same period last year. Revenue growth by product for

Foods, Beverages and Milk was 24%, 16% and 4% respectively. High cost of utilities and

their erratic supply especially water and increasing raw material cost were to a greater

extend responsible for the 13.97% hike in Operating cost which surged to US$44.3

million.

Increase in productivity and slight margin improvements heightened Operating profit by

20% from US$3.7 million in H1 2011 to US$4.4 million in H1 2012. Profit for the period

improved by 36% over the same period last year to US$3.144 million. EPS increased by

36% from H1 2011’s 0.65c to 0.88c in H1 2012. Interest bearing debt increased by 3% to

US$5.99 mil at an average cost of 10% per annum compared to the same period last

year. In efforts to cement its working capital position and invest in capacity building the

group secured a US$4 mil five year facility from PTA bank at a cost of 11% p.a. Capital

expenditure budgeted for the current financial year is US$7.19 mil compared to US$4.05

mil for last year.

Continued efforts to work with dairy farmers on strategies to grow raw milk production

paid off as milk intake increased by 5% (Zimbabwe 9% and Malawi -7%). Sales volumes

were 9% higher than the same period last year at 12.889 million litres Increased capacity

from significant investment in yoghurt, Nutriplus and Cascade equipment made in 2011

drove growth in food and beverages. Malawi operations were affected by foreign

currency shortages, exchange rate risks, inflation rates and restrictive retention policies;

business confidence is however expected to be restored following new socio economic

and political policies announced by the Malawian government.

In the FY 2012 the company is targeting volumes growth of 20%, revenue growth of 23%

while profit margins are expected to be at 12% from the current 11%, supporting the

anticipated growth in revenues are increased capital commitments targeted at increasing

production capacity for value added products, cementing distribution capacity and

efficiencies, cold chain facilities and milk supply developments.

Going forward we forecast restrained margins in light of stagnating economic growth

and limited purchasing power from suppressed disposable incomes. Improved earnings

will be achieved from intensified marketing efforts, prudent working capital

management, tight cost management efforts and strategic procurement arrangements.

Our Recommendation

Margins on the group’s brands are threatened by stiff competition from imports; there is

limited scope for any player in the dairy product market to increase price given the

suppressed disposable incomes and monopolistic competition environment prevailing in

the market, leaving the company’s hopes underpinned on volumes growth and

broadening the distribution network to consolidate its position on the dairy product

market. We project revenue growth of between 16% and 20%, a bit lower than

management’s expectations of 23%, we expect volumes to increase by 21% projecting

forward EPS of between 2c and 2.3 cents to 2.6 cents.

Market Statistics

Sector Agri-Industrial



Market Cap 57,585,367.64$

Beta 0.579

Target Price Usc 22c



volumes 193,845.98

YTD Peal Price 21

YTD low Price 14

Current Price 16.31



3 months 3.00%

12 months -26.00%

Rating Buy

Share returns

22 | P a g e

Hippo

Financial highlights for FY 2011

Revenues grew by 80% from last year’s US$88 million to close the year at a decent US$129 million. Growth in Operating Costs associated with this growth in revenues was 27% to push total operating costs to US$97 million leading to a lower cost to income ratio of 84% opposed to 90% achieved in the prior financial year.

The Net Profit margin improved to 16% during the period vs 10% achieved in FY 2010 driven by (i) encroachment in the operating profit margin up 25% from 14% in the prior year, (ii) an improvement in total asset turnover from 28% in FY2011 to 38% during the financial period under review. Earnings Per share increased by 137% a relatively comfortable 10.9 cents from 4.6 cents in the prior year. Cash flow from operations improved by 1,202% to US$13.9 million in FY 2011 from US$1.264 in the prior year driven by strong asset turnover improved management of the working capital cycle.

The company’s Sugar production in the 2011/12 season improved by 30% to 170,000 tons from 131,000 tons in the 2010/11 season. Hippo Valley’s contribution to the industry’s sugar production also improved from 39% in the prior period to 46% in the period under review while total industry production increased by 12% from 333,000 tons to 372,000 under the same period. The company’s plant utilization was 53% compared to 58% for the industry. Crushed cane increased by 37% from 1,008,779 tons in the 2010/11 season to 1,382,387 tons in the 2011/12 season (Hippo valley‘s contribution dropped 9% to 77% vs 86% FY2010). Average yield per hectare improved to 89.6 tons per hectare from 83.5 tons in the prior season.

The total industry’s domestic market sales for the year under review totaled 247,000 tons, a 34% improvement from 184,000 tons last year. Domestic sugar prices were in line with regional trends in the period with demand firming. Raw sugar exports to the European Union under preferential market arrangements at favorable prices amounted to 125,000 tons. The company has an optimal target of 60%/40% for domestic/export markets. Water storage in dams that supply 16% of the industry’s area is being carefully managed to ensure the availability of irrigation water until the 2012/13 rainy season following poor rainfall in these catchment areas. Going forward, water from Tokwe Mukosi dam (under construction) will supplement Mutirikwi water for irrigation and open up significant additional cane production capacity. The company utilized a capital expenditure budget of US$22.5 million over the last 3 years, placing the company in a position to increase its capacity and output in the coming years.

Our Recommendation

Sugar production in Zimbabwe is expected to be between 450 000 and 500 000 tons in the 2012/13 season an increase of between 20% to34% courtesy of an increase in replanted area as well as the anticipated crushing of cane from Chisumbanje. Hippo valley’s sugar production is expected to be between 200 000 and 230 000 tons in the 2012/13 season. Restoration of the country’s sugar production capacity of around 640 000 tons per annum will continue to be a target in the 2012/13 season. We expect Industry capacity utilization to increase to 70% in 2013 around 450 000 tons. Revenues are expected to grow by 20% to 25% to around US$161 mil and operating profit to slightly increase to around 27%. Net Profit margin is expected to anchor at 17.5% (Net Profit of around US$28 Mil) and an EPS of 14.59c and a forward PER of 6.9 times. We rate the counter as a BUY considering the expected boost in operations from the Tokwe Mukosi project.

Market data

Sector Agri-Industrial



Market Cap 212,322,620.40$

Beta 1.13

Target Price Usc 146c



volumes 45,262.53

YTD Peal Price 115

YTD low Price 95

Current Price 110



3 months 10.00%

12 months 10.00%

Rating Buy

Price vs. Volumes

23 | P a g e

Contacts

Managing Director: Benson – [email protected] 0773 940 774 Front Office: Richard - [email protected] 077 2 446 789

Manatsa - [email protected] 077 3 289 120

Davide - [email protected] 077 3 940 770

Research: Yvonne - [email protected] 077 3 437 869

Martin – [email protected] 077 5 203 746

Albert – [email protected] 0775 198 997

Disclaimer: The views expressed in this document reflect the views of FBCH Securities Research based on

the information available at the time of writing and as such, may change without notice. It is provided for

information purposes only and whilst reasonable steps have been taken in carefully preparing this document,

no responsibility can be taken for any action based on information contained herein.

This document may not be reproduced, distributed or published by any recipient.

equities outlook 2012 zimbabwe

Investor Relations

zimbabwe limited

zimbabwes economic prospects

machinery power

countrys precondition

quick economic recovery

limited capital sources

hwange power station

overall electricitygeneration